You must be speaking about working capital quite often. But this particular term is the key to the success of the company. Moreover, the working capital affects many aspects of the business organization. It particularly affects the payment of the employees or vendors.
In other words, working capital is that fund available in the company and helps meet various short-term obligations. You can ascertain that you have the right amount of working capital by calculating your company’s net working capital.
What is working capital?
The working capital refers to the difference between its current liabilities and the assets. The current assets are particularly those things that the company owns. One can turn it into cash within a year. But the liabilities relate to the expenses and costs that the business incurs within a year.
The working capital of a company reflects budget management and operational efficiency. When a business requires more current liabilities, then the working capital would be negative. It means that the business is having difficult times while meeting financial obligations. On the other hand, if the company pays all the expenses while having an ample amount of funding, then the company’s working capital is high.
Factors that affect the working capital
How much net working capital a business requires to run its small business organization depends on some of the factors. Some of these factors include:
1. Business type
Certainly, the type of business requires higher working capital. Especially the business that has physical inventory requires a considerable amount of the gross working capital for running the business. It can include both the wholesale business as well as the retail ones. Apart from that, the manufacturing business requires the purchase of continuous raw materials to produce the house’s inventory. In that case, the business also requires a proper flow of the working capital.
However, some businesses are seasonal. Such businesses require high working capital. In addition to that, some businesses offer intangible services of products. These business organizations require lower working capital. Apart from that business that matured a long way requires a reduced need for its working capital.
2. Operating cycle
Ideally, any business would pay the short-term debt with the received revenues that it incurs from sales. Companies that require a long time for creating and selling the product require excess working capital to ensure all the financial stability. Similarly, companies that help bill customers for various goods and services need higher working capital to make the payments. But this is the case if one cannot make the account receivables in the given time.
3. Management goals
The specific goal of any business owner is the important factor that helps to determine the amount of working capital that the business requires. If the small business organization is new in the business realm and wants to expand, then the business will require higher working capital. It is particularly true for any business planning to expand the product lines and wants to venture into the new markets.
A business might require additional working capital in some of the cases. Especially during the seasonal differences in the cash flow, the company would require extra capital to sustain the busy season and keep the business operating. Extra working capital would help the business to improve in various ways. Also, it can help to cover the project-related expenses.